December 2020
ACATIS QILIN Marco Polo Asia Fund has developed successfully
2020 has been quite a year, with significant headlines and headwinds. Nonetheless, the ACATIS QILIN Marco Polo Asia Fund has returned 38% this year and over 59% since inception one and a half years ago. We achieved significant alpha and outperformed the benchmark index, MSCI AC Asia GDR (EUR), by 27% in 2020 and 36% since inception. Morningstar has consistently ranked us in the top 1% of funds in its category. The fund has grown to nearly 140 million Euros in a span of 18 months. We sincerely thank you for your trust and investment.
2020 Year in Review
As we embark on a new year, we’d like to take a moment to review some of the defining moments of 2020. Specifically, key events like the Covid-19 pandemic, the ongoing US-China conflict and new global alliances have disrupted our existing world order. China has emerged from these events in the last year to become even more dominant .
1. China is the only major economy with positive GDP growth post-COVID
The key headline in 2020 was the pandemic that swept across the world, overwhelming health care systems and toppling economies like dominoes. China was the first to emerge from the crisis through draconian containment measures. Other Asian markets like South Korea, Taiwan and Vietnam were also able to successfully manage the virus through widespread use of face masks, deployment of technology for location tracking and aggressive contact tracing.
As country after country locked-down, GDP plummeted. Most major economies will post negative growth in 2020, except for China. Its economy posted a V-shape recovery in Q2 and achieved +2.3% GDP growth in 2020. Economists predict that China’s GDP growth will reach 8% in 2021.
2. US-China conflict results in China as the clear winner
The Trump administration aimed to reverse the US trade deficit with China and applied tariffs on US$550 billion worth of Chinese goods. In retaliation, China imposed tariffs on US$185 billion of American products. A trade agreement was signed between the countries to roll back tariffs and ensure purchasing commitments. When the dust settled at year-end, the trade war concluded with China’s exports reaching at an all-time high. The Chinese trade surplus with the US hit $317 billion , the second highest amount on record.
The US-China conflict continued on the tech battleground. The US administration placed over 260 Chinese companies on an “Entity List” or trade blacklist , preventing companies from doing business with them. Huawei, one of the companies on the list, was no longer able to purchase microprocessors and Android software. Despite the ban, Huawei overtook Samsung as the world’s #1 smartphone producer by units in Q2 2020.
In addition to delisting 3 Chinese telecom stocks in the US, Trump also issued an investment blacklist prohibiting US companies from investing in 35 Chinese companies. These blacklisted companies dropped sharply in value as global indices such as MSCI, FTSE Russell and S&P Dow Jones index divested their holdings to comply. However, Chinese investors have piled in to search for bargains and boost share prices. They have invested nearly US$16 billion within first 9 trading days of the new year through Hong Kong Stock Connect, a record inflow of capital
3. New Global Alliances with China at the Center
Two landmark agreements were signed in 2020. In November, 15 countries in Asia Pacific formed the Regional Comprehensive Economic Partnership (RCEP), a landmark free trade agreement. RCEP is the world’s largest trade bloc with ~30% of the world’s population and GDP. The agreement will further strengthen intra-Asia supply chains and shift the region towards China (the bloc’s largest member) and away from the US and Europe.
In December, Europe and China signed the Comprehensive Agreement on Investments (CAI) with the aim of increasing international cooperation and bilateral investments. The deal in principle ensures greater level of market access and level playing field for EU investors in China. What is significant about the agreement is that Europe has effectively aligned itself with China, rather than waiting for the US Biden administration to jointly deal with China.
These two trade agreements reflect the shifting political winds and growing economic clout of China. While most countries would prefer not to have to choose between the US and China, it appears that China’s meteoric rise is creating a new world order .
Implication for Investors
China has emerged from 2020 in pole position from a geopolitical and economic perspective, and capital naturally follows these shifts. For example, Chinese companies represent nearly 40% of global IPOs in 2020. For investors, this highlights the growing importance of Asia and China in a forward-looking portfolio. The ACATIS QILIN Marco Polo Asia Fund, with it‘s focus on growth and value in Asia, is uniquely positioned to capture China investment opportunities.